Jefferies A Global Investment Banking Firm

Jefferies – A Global Investment Banking Firm October 2016 Jefferies LLC Member SIPC Notes on Forward Looking Statements This document contains “for...
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Jefferies – A Global Investment Banking Firm October 2016

Jefferies LLC Member SIPC

Notes on Forward Looking Statements This document contains “forward looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements include statements about our future and statements that are not historical facts. These forward looking statements are usually preceded by the words “expect,” “intend,” “may,” “will,” or similar expressions. Forward looking statements may contain expectations regarding revenues, earnings, operations, and other results, and may include statements of future performance, plans, and objectives. Forward looking statements also include statements pertaining to our strategies for future development of our business and products. Forward looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forwardlooking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward looking statements is contained in reports we file with the SEC. You should read and interpret any forward looking statement together with reports we file with the SEC.

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Jefferies – A Global Investment Banking Firm 









Full-Service Capital Markets Platform: expertise and depth across equities, fixed income and investment banking Client-Focused: providing investor and issuer clients with the highest quality advice and execution Global Footprint: sales & trading and investment banking presence across the United States, Europe and Asia Strong, Stable Foundation: robust long-term capital base, comparatively low leverage and free from dependence upon government support Positioned to Seize Market Share: having broadened our product offering and hired additional key talent during the downturn, Jefferies is positioned to grow market share

1

Earnings Update – Q3 2016 ($ Millions)

Third quarter ending August 31, 2016 performance:

Nine months ended August 31, 2016 performance:



Net Revenues: $654 million



Net Revenues: $1,673 million



Pre-Tax Earnings: $81 million



Pre-Tax Earnings (Loss): ($67) million



Net Earnings: $41 million



Net Earnings (Loss): ($72) million



Revenues by Source:



Revenues by Source:

Investment Banking: Advisory $154

Investment Banking: Capital Markets $141

Investment Banking: Advisory $430

Equities $148

Asset Mgmt. and Other $16

Investment Banking: Capital Markets $349 Asset Mgmt. and Other $30

Fixed Income $195

2

Equities $374

Fixed Income $491

Liquidity and Funding Principles Jefferies’ long-standing liquidity and funding principles have maintained the strength and soundness of our platform across market cycles 











Owning inventory that is composed of liquid assets that turn over regularly, with Level 3 assets at ~3% of inventory Maintaining a sound, long-term capital base and reasonable leverage relative to our business activity

No material reliance on short-term unsecured funding or customer balances. No commercial paper program Short-term secured funding that is readily and consistently available through clearing houses, or fixed for periods of time that exceed the expected tenure of the inventory they are funding Assessing capital reserves and maintaining liquidity to withstand adverse changes in the trading or financing markets and a firm specific idiosyncratic stress Where appropriate, entering into partnerships and joint ventures with complementary long-term partners to pursue business opportunities that otherwise may exceed our capital capacity or risk tolerance (Jefferies Finance, Jefferies LoanCore)

3

Core Operating Principles Jefferies is focused on the following core principles to manage risk and deliver across-the-cycle revenue and earnings growth: 

Strong Liquidity ─



Limited Leverage ─



Jefferies maintains a consistent, carefully managed leverage ratio, and has demonstrated the operational and financial flexibility to reduce leverage in times of stress

Driving Productivity ─



Jefferies’ maintains a very liquid, financeable and low-risk balance sheet

Jefferies continues to increase investment banker productivity

Taking Market Share ─

Since 2008, Jefferies has grown market share by: 





Taking advantage of market dislocation and our competitors’ ongoing struggles to enter new businesses and regions and expand existing capabilities Delivering broader and better capabilities to our clients

Culture ─

Jefferies is transparent, not arrogant, client focused and creditor friendly

4

Strong Capital Structure and Ample Liquidity 





Jefferies maintains a highly liquid balance sheet, with low gross leverage and exposure to illiquid assets, and significant structural liquidity Jefferies continues to manage the size of its balance sheet in response to market conditions and volatility ─

Total assets: $38.1 billion



Leverage: 7.2x



Tangible gross leverage: 10.5x

(1) (2)

Long-term capital of $10.8 billion

(1) Leverage ratio equals total assets divided by total equity. (2) Tangible gross leverage ratio and tangible gross assets are non-GAAP financial measures. Tangible gross leverage ratio equals tangible gross assets divided by tangible member's equity. Tangible gross assets equals total assets less goodwill and identifiable intangible assets. Tangible member's equity represents total member's equity less goodwill and identifiable intangible assets. The tangible gross leverage ratio is used by rating agencies in assessing our leverage ratio. See Appendix on page 15 for a reconciliation to GAAP measures. 5

Limited Leverage  

Jefferies has a long-standing policy of carefully managing balance sheet leverage In periods of stress, Jefferies has demonstrated the ability to rapidly reduce leverage without unduly impacting our business

Historical Quarterly Leverage

(1)

($ Millions)

$50,000

13.0x 12.0x

$40,000

11.0x 10.0x

$30,000

9.0x $20,000

8.0x 7.0x

$10,000

6.0x $-

5.0x

Tangible Gross Assets

Tangible Gross Leverage

Source: Jefferies. (1) Tangible gross leverage ratio and tangible gross assets are non-GAAP financial measures. Tangible gross leverage ratio equals tangible gross assets divided by tangible member's equity. Tangible gross assets equals total assets less goodwill and identifiable intangible assets. Tangible member's equity represents total member's equity less goodwill and identifiable intangible assets. The tangible gross leverage ratio is used by rating agencies in assessing our leverage ratio. See Appendix on page 15 for a reconciliation to GAAP measures. 6

Strong Liquidity 

Jefferies’ trading inventory is liquid and low-risk, rapidly turning in order to serve client flow



Very liquid inventory







78% of financial instruments owned are readily and consistently financeable at haircuts of 10% or less



Level 3 Trading Assets represent only 3.0% of long inventory – consistent over past 24 quarters

Reliable secured funding ─

Approximately 76% of our repurchase financing activities use collateral that is considered eligible collateral by central clearing corporations.



No reliance on short-term unsecured funding or customer balances. No commercial paper program

Client-focused ─

Fee and flow based businesses represent preponderance of net revenues

Note: All figures are as of May 31, 2016. 7

Level 3 Trading Assets Overview 

97% of inventory is Levels 1 and 2, with a minimal amount of Level 3 Trading Assets



Level 3 Trading Assets

(1)

(1)

represent only 13% of tangible member’s equity

Level 3 Financial Instruments Owned (1) as a Percentage of Financial Instruments Owned ($ Millions)

10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

2.7%

3.0%

2.5%

2.5%

2.6%

2.4%

2.6%

2.8%

2.9%

2.5%

2Q 13

3Q 13

4Q 13

1Q 14

2Q 14

3Q 14

4Q 14

1Q 15

2Q 15

3Q 15

Level 3 Financial Instruments Owned

(1)

as a Percentage of Tangible Member’s Equity

3.3%

3.6%

4Q 15

1Q 16

15.0%

14.4%

4Q 15

1Q 16

2.9%

3.0%

2Q 16

3Q 16

12.6%

12.5%

2Q 16

3Q 16

(2)

($ Millions)

40% 30%

20%

13.0%

12.9%

12.7%

13.3%

12.8%

12.9%

13.8%

15.3%

15.1%

2Q 13

3Q 13

4Q 13

1Q 14

2Q 14

3Q 14

4Q 14

1Q 15

2Q 15

13.2%

10% 0%

3Q 15

(1) Note: In May 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-07, "Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." Jefferies has adopted this guidance retrospectively during the second quarter of fiscal 2015. (2) Tangible member's equity (a non-GAAP financial measure) represents total member's equity less goodwill and identifiable intangible assets. See Appendix on page 15 for a reconciliation to GAAP measures.

8

Value-at-Risk (VaR) ($ Millions)

Daily VaR Risk Category

Average VaR for the Three Months Ended 08/31/16

Adjusted Firmwide (1)

$4.48

Interest Rates

$4.90

Equity Prices

4.48

Currency Rates

0.21

Commodity Prices

1.09

Diversification Effect

(4.06)

Firmwide

$6.62

(1) Excluding our investment in KCG, our average VaR was $4.48 million for the 3 month ended August 31, 2016. 9

Liquidity Pool ($ Millions)



Jefferies maintains significant excess liquidity on hand

Total Liquidity Pool $6,000

$5,574 $5,187

$5,824 $5,913 $5,282

$5,000

$5,500 $4,647

$4,467

$4,951

$5,151

$5,020 $4,290

14.4% $4,000 $3,000

13.3%

13.4%

13.1%

18.0%

$5,081

13.2%

13.2%

12.4% 10.6%

10.3%

11.2%

12.0%

12.2%

$4,603

12.4%

13.2%

15.0% 12.0% 9.0%

$2,000

6.0%

$1,000

3.0%

$0

0.0%

Cash & Cash Equivalents

Other Liquidity Sources

(1)

Liquidity Pool as % of Total Assets

(2)

(1) Consists primarily of securities purchased under agreements to resell, our U.K. liquidity pool, unencumbered inventory representing an estimate of the amount of additional secured financing that could be reasonably obtained and funds available under our senior secured revolving credit facility. (2) Cash & Cash Equivalents plus Other Liquidity Sources, divided by Total Assets. 10

Long-Term Debt Profile 

As of 08/31/2016, our $5.2 billion notional of long-term debt had a weighted average maturity of approximately 8 years



$345 million convertible bond is puttable in November 2017 and $6.7 million in May 2017



No maturity of long-term debt in a single year is greater than 20% of outstanding long-term debt



$1.1 billion, or 17%, of unsecured long-term debt was repaid from June 2014 to August 2016



We have issued over $200 million of long-term structured notes in 2016 with a weighted average maturity of 10.9 years

Long-Term Debt Maturity Schedule (Notional) ($ Millions)

$1,000 $800 $600 $400 $200 $0

11

Credit Ratings Jefferies Group LLC Agency

Rating

Outlook

Standard & Poor’s

BBB-

Stable

Moody’s

Baa3

Stable

Fitch

BBB-

Stable

Agency

Rating

Outlook

Standard & Poor’s

BBB

Stable

Moody’s

Baa2

Stable

Agency

Rating

Outlook

Standard & Poor’s

BBB

Stable

Moody’s

Baa2

Stable

Subsidiaries Jefferies LLC

Jefferies International

Note: As of August 31, 2016. 12

Appendix

13

Balance Sheet Overview As of August 31, 2016 ($ Millions)

Jefferies Group LLC Balance Sheet as of 8/31/2016 Assets Cash & Cash Equivalents Cash & Securities Segregated Financial Instruments Owned Investments in Managed Funds Loans to and Investments in Related Parties Securities Borrowed Securities Purchased Under Agreements to Resell Receivables from Brokers, Dealers and Clearing Organizations Receivables from Customers Fees, Interest and Other Receivables Premises and Equipment Goodwill Other Assets Total Assets Leverage: (1) Tangible Gross Leverage:

$

Liabilities and Equity 3,159 Short Term Borrowings 1,027 Financial Instruments Sold, Not Yet Purchased 14,328 Securities Loaned 192 Securities Sold Under Agreements to Repurchase 657 Other Secured Financings 8,461 Payables to Brokers, Dealers and Clearing Organizations 4,038 Payables to Customers 1,938 Accrued Expenses and Other Liabilities 849 Long-term Debt 293 Total Liabilities 255 1,645 Member's Equity 1,286 Noncontrolling Interests Total Equity

$ 38,128 Total Liabilities and Equity

(2)

7.2x 10.5x

Note: As presented in Jefferies public filings. (1) Leverage ratio equals total assets divided by total equity. (2) Tangible gross leverage ratio (a non-GAAP financial measure) equals total assets of $38,128 million less goodwill and identifiable intangible assets of $1,856 million divided by tangible member's equity of $3,465 million. Tangible member's equity represents total member's equity of $5,321 million less goodwill and identifiable intangible assets of $1,856 million. The tangible gross leverage ratio is used by rating agencies in assessing our leverage ratio.

14

$

$

432 7,944 2,930 8,130 606 3,495 2,749 1,030 5,483 32,801

$

5,321 5 5,327

$

38,128

Tangible Assets and Tangible Member’s Equity GAAP Reconciliation

2013 3Q 4Q

38.9 38.8 40.2 43.4 43.6 44.8 44.5 43.8 44.1 42.8 38.6 35.2 37.1 38.1 2.0 2.0 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 37.0 36.8 38.2 41.5 41.6 42.8 42.6 41.9 42.2 40.9 36.7 33.3 35.2 36.3 5.2 2.0 3.2

5.3 2.0 3.3

5.4 2.0 3.4

5.5 2.0 3.5

5.6 2.0 3.6

5.4 1.9 3.5

1Q

5.4 1.9 3.5

5.5 1.9 3.6

5.5 1.9 3.6

4Q

5.5 1.9 3.6

1Q

2016 2Q 3Q

Total Assets (GAAP) Less: Goodwill and Intangibles Tangible Gross Assets (Non-GAAP)

5.1 2.0 3.2

4Q

2015 2Q 3Q

($ Billions)

Total Member's Equity (GAAP) Less: Goodwill and Intangibles Tangible Member's Equity (Non-GAAP)

1Q

2014 2Q 3Q

2Q

5.3 1.9 3.4

5.3 1.9 3.5

5.3 1.9 3.5

Note: Jefferies tangible gross assets and tangible member’s equity are unaudited non-GAAP financial measures that begin with information prepared in accordance with U.S. GAAP and then are adjusted to exclude goodwill and intangibles. Management believes that the tangible gross assets and tangible member’s equity are common metrics used by many investors in its industry to evaluate performance from period to period. 15

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